The high-risk, high-stakes plan to export LNG from B.C. to Asia

As British Columbia eyes the lucrative Asian market for liquefied natural gas, industry experts are cautioning that the global race to export LNG will give Japan and China the clout to reduce premium prices for the commodity.

While natural-gas futures in the U.S. market have been trading at around $4 (U.S.) per million British thermal units, Asian customers are currently paying LNG prices that are at least four times higher than typical contracts for natural gas within North America.

"LNG is the biggest and highest-risk piece of the global energy business these days. These are enormous projects and huge bets on the future in an uncertain pricing and supply environment," said Mikkal Herberg, research director of the energy security program at the Seattle-based National Bureau of Asian Research.

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The large price spread between natural gas in Canada and LNG in Asia will be one of the key subjects at the Pacific Energy Summit being held Wednesday and Thursday in Vancouver.

More than 150 delegates from around the world will be at the event co-sponsored by the bureau and the Vancouver-based Asia Pacific Foundation of Canada. This week's gathering marks the first time that the conference has been held in North America. The first three events were staged in Tokyo, Jakarta and Hanoi.

Mr. Herberg, who will moderate a session on forging energy co-operation between North America and Asia, said in an interview Tuesday that he expects a couple of LNG projects in British Columbia will come to fruition within five to seven years.

LNG Canada, a joint venture led by Royal Dutch Shell PLC, filed a summary of its proposal on Tuesday with federal and B.C. regulators. LNG Canada said in its 39-page filing that it plans to begin construction in 2015, subject to environmental and regulatory approvals. The venture's first phase is slated for completion in 2019-20, with the project's lifespan slated to last more than 25 years.

Transporting LNG in tankers from Canada's West Coast would help meet the thirst in Asia, which is forecast to account for the bulk of increased LNG demand globally over the next two decades. The trouble is that even though Asian customers, led by Japan, are willing to pay $16 to $18 per million British thermal units in 2013, these importers will be seeking to get better deals in the years ahead. Instead of directly linking LNG contracts with crude oil prices, Asian customers will be trying to drive down premiums through new pricing formulas, Mr. Herberg said.

Canada is poised to play an important role in providing a new source of LNG for Asia, but suppliers must be prepared for price volatility. "Markets change, and you can end up doing things and spending money on things that five years later look very dumb," Mr. Herberg said.

As the number of LNG suppliers grows, "sophisticated Asian buyers" will be better positioned to push for more flexible pricing regimes for LNG, but Canadian projects will need to be primarily linked to oil prices to justify capital costs, said Shahriar Fesharaki, principal consultant at Facts Global Energy.

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Yuen Pau Woo, president of the Asia Pacific Foundation of Canada, said that while numerous projects have been proposed, there is still a long way to go before even one gets started in B.C. "The opportunity for LNG is massive, and the expectation is something will happen, but it will not happen by default. Don't get me wrong. I'm a huge supporter of energy trade, but we can't get complacent," he said.

The fledgling export market in Canada for LNG will be competing against an array of projects in Russia, Australia, offshore Africa, the U.S. Gulf Coast and Alaska, so ventures planned for British Columbia can't afford to be late off the mark, experts say.

Ken Koyama, the Tokyo-based chief economist at the Institute of Energy Economics, said Japan, South Korea, China and India are thirsty for LNG. B.C. projects have a geographical advantage in being closer to Asia than prospective LNG suppliers in the U.S. Gulf Coast, he noted.

"Demand for LNG is increasing in Asia. The question is whether the current LNG import prices can be maintained or what the future will hold," Mr. Koyama said.

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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